Fed's plan should just beat it

By Loren Steffy |
July 30, 2009

I'm not implying that the balding and bearded Ivy League economics professor now running the Federal Reserve moonwalks or leads the Open Market Committee in a re-enactment of Thriller. Rather, Bernanke seems to want more power with less scrutiny, much as the King of Pop craved fame while seeking privacy.

In the wake of the financial crisis, Bernanke has championed, and the Treasury Department has supported, extending the Fed's powers to regulate non-banks. Had it had such authority last fall, it might have saved Lehman Brothers and muted the economic fallout in the credit markets that brought our financial system to the brink of collapse.

But in moving to extend credit to businesses, the Fed is straying into Congress' turf, which threatens to draw the central bank into politics.

Earlier this week, at a meeting in Kansas City, Bernanke criticized a bill sponsored by longtime Fed-hater Ron Paul, R-Lake Jackson. Paul's bill, which now has almost 280 co-sponsors in Congress, would require routine audits of the Fed. Such oversight would destroy the Fed's independence, Bernanke argued.

“I don't think the American people want Congress running monetary policy,” he said.

Bernanke argues that the Fed's mandate to maintain a stable financial system requires additional powers to regulate non-banks that deal in financial instruments, such as credit-default swaps, that can have broad economic implications.

But he can't have it both ways. Giving the Fed broad additional powers beyond monetary policy demands increased accountability.

“The Fed shouldn't get too much power,” said Mahmoud El-Gamal, chairman of the economics department at Rice University. “They already have the systemic stability provisions. Expanding that beyond what they already have just broadens their power too much.”

Besides, the Fed is going to have its hands full taming the inflation that may result from the bailouts and stimulus of the past year.

“We know they're going to have to suck up all this liquidity later on,” El-Gamal said. “That should be the primary mandate — to clean up the mess later.”

The Fed has always been an awkward anomaly in our democracy. In his classic book Secrets of the Temple,William Greider characterized the central bank as “an uncomfortable contradiction with the civic mythology of self-government.”

The Fed was created to be free of political influence so that it could act on what's best for the financial system, rather than political whim. That autonomy may be more important than broader powers.

The Fed was created to be free of political influence so that it could act on what's best for the financial system, rather than political whim. That autonomy may be more important than broader powers.

If it had had more oversight responsibility, the Fed might have been able to save Lehman Brothers, but there were other solutions. It was Congress, after all, that bent to Wall Street's wishes and allowed investment banks to take on too much debt, which ultimately crushed Lehman. It was Congress that declined to regulate the derivatives market, and it is Congress that even now could be imposing more stringent standards on the rating agencies that made a mockery of their role as arbiters of creditworthiness.

If Congress is serious about preventing another crisis, it will tell Bernanke and his plans for expanded Fed powers to beat it. Lawmakers should be talking to the men — and women— in the mirror.